sol_03 - Chapter 3: Consumer Behavior 22 CHAPTER 3 CONSUMER...

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Unformatted text preview: Chapter 3: Consumer Behavior 22 CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals’ preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers more beer no matter how many hamburgers he has. For Al, hamburgers are a “bad.” His indifference curves slope upward and to the right rather than downward and to the left. For Al, U 1 is preferred to U 2 and U 2 is preferred to U 3 . See figure 3.2a. If you instead assumed that hamburgers were a neutral good, then the indifference curves would be vertical and utility is increasing to the right as more beer is consumed. b. Betty is indifferent between bundles of either three beers or two hamburgers. Her preferences do not change as she consumes any more of either food. Since Betty is indifferent between three beers and two burgers, an indifference curve connects these two points. Betty’s indifference curves are a series of parallel lines with slope of - 2 3 . See figure 3.2b. c. Chris eats one hamburger and washes it down with one beer. He will not consume an additional unit of one item without an additional unit of the other. For Chris, hamburgers and beer are perfect complements, i.e., he always wants to consume the goods in fixed proportions to each other. The indifference curves are L- shaped, with corners on a 45-degree line out of the origin. See figure 3.2c. Hamburgers Beer U 3 U 2 U 1 Figure 3.2.a Chapter 3: Consumer Behavior 23 Hamburgers Beer U 1 U 2 U 3 1 2 3 4 5 6 7 8 9 3 6 9 Figure 3.2.b d. Doreen loves beer but is allergic to beef. Every time she eats a hamburger she breaks out in hives. For Doreen, hamburgers are not considered a “good” but rather a “bad,” and thus her preferred position is not upwards and to the right, but rather downward and to the right. For Doreen, U 1 is preferred to U 2 and U 2 is preferred to U 3 . See figure 3.2d. Hamburgers Beer U 1 U 2 U 3 1 2 3 1 2 3 Figure 3.2.c Chapter 3: Consumer Behavior 24 Hamburgers Beer U 1 U 2 U 3 Figure 3.2.d 3. The price of tapes is $10 and the price of CD’s is $15. Philip has a budget of $100 and has already purchased 3 tapes. He thus has $70 more to spend on additional tapes and CD’s. Draw his budget line. If his remaining expenditure is made on 1 tape and 4 CD’s, show Philip’s consumption choice on the budget line. Given Philip’s remaining income of $70, he can afford 7 tapes if he spends the entire amount on tapes, and he can afford 4.7 CD’s if he spends the entire amount on CD’s. According to figure 3.3, his budget line therefore intersects the vertical axis at a quantity of 7 tapes and the horizontal axis at a quantity of 4.7 CD’s. Since he faces constant prices, the budget line has a constant slope and is a straight line....
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This note was uploaded on 12/27/2011 for the course FBAE 201 taught by Professor Eefwf during the Spring '11 term at Institute of Technology.

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sol_03 - Chapter 3: Consumer Behavior 22 CHAPTER 3 CONSUMER...

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